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Subsidies Notes - A-level & IB Economics
The document discusses subsidies, defined as government funds provided to influence the production or consumption of goods and services. It explains how subsidies affect market prices and quantities, shifting the supply curve and altering consumer and producer surpluses. Additionally, it evaluates the effectiveness and implications of subsidies, including their dependency on price elasticity of demand and supply, as well as their opportunity costs to the government.
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Subsidies Notes - A-level & IB Economics
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- 2. Lesson Structure ◦Subsidies ◦ Definition ◦ Diagram ◦Effects on Stakeholders ◦ Evaluation
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- 7. The Supply Curve Price Quantity Supplied £2 4 £3 6 £48 £5 10 £6 12 Quantity0 Price S 2 4 4 8 1 3 5 12 6 6 10
- 8. Plot the Supply Curve with Subsidy Quantity0 Price Price Quantity Supplied Price after £1 Subsidy £2 4 £1 £36 £2 £4 8 £5 10 £6 12 2 4 4 8 1 3 5 12 6 6 10
- 9. Supply Curve with Subsidy Quantity0 Price SPrice Quantity Supplied Price after £1 Subsidy £2 4 £1 £36 £2 £4 8 £3 £5 10 £4 £6 12 £5 2 4 4 8 1 3 S1 5 12 6 6 10 £1 The vertical distance Is the price of the subsidy:
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- 18. Subsidy Example Quantity0 Price 2 4 4 8 1 3 5 12 6 6 10 Remember to show clearly the area of subsidy received by the producer, by the consumer, and paid by the government. -Try to calculate the total amount of the subsidy the government has to pay. - Next, try and calculate how much of the subsidy is received by the producer. S D
- 19. Subsidy Example Quantity0 Price PC = 2 PP = 4 4 8 1 PE= 3 5 12 6 6 10 Total amount of subsidy the government has to pay (rectangular area): (£4 – £2) x 8 = £16 Subsidy received by the producer (blue area): (£3 – £2) x 8 = £8 Quantity0 Price S S1 D Q £2 Q1
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- 24. Evaluating Subsidies - Subsidies can be effective in promoting consumption of a good by reducing market price - A subsidy has limited effect on increasing market quantity when PED is inelastic, since a large amount of subsidy can only cause a small increase in purchasing necessities -How much the subsidy actually benefits the consumer/producer depends on how much more consumers will buy given a discount (PED), and how difficult it is to produce it (PES) - Subsidies are an opportunity cost to the government, as they need to pay for it, which means less can be spent on other goods and services like healthcare and education - There can be government failure i.e. there is not enough information to ensure the right amount of subsidy is set in the market
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